Mining ban, curbs on coal production stretch current account deficit

Written by Raj Kumar Ray | Kiritika Suneja | New Delhi | Updated: Feb 14 2013, 09:21am hrs
The ban on the mining of iron ore in states like Karnataka, Goa and Orissa for most part of 2012 and environmental restrictions on coal mining have taken a toll on the countrys macro-economic fundamentals, contributing, in a good measure, to the widening trade and current account deficits.

While the exports of iron, traditionally a major item in the country's export basket, have fallen by a steep 63.6% year-on-year to $1.2 billion during April-December 2012, value-added exports (iron and steel) also fell 14.4% to $4.2 billion. India's coal deficit has been on the rise owing to lack of competition in the mining of the fuel and technological obsolescence. More recently, the environment ministry's earmarking of potential areas for coal mining as no-go areas have hit the sector hard. Coal export, marginal though it is, has fallen too in the first nine months of this fiscal, by 21.9% to $56 million.

Iron ore, steel and coal contributed almost 10% of the trade deficit during April-December 2012, which is the same level as it was during the whole of 2011-12, but more than double the 2009-10 level of 4.3%. Net coal imports alone was 22.2% of CAD in the first half of this fiscal.

According to the government data released on Tuesday, mining output fell 4% year-on-year in December and was down 1.9% in first nine months of 2012-13. The sector has started showing signs of slowdown since 2011-12 when output fell by 2% after ban on illegal mining halted excavation of iron ore and coal.

Restrictions on mining due to tough environment compliance norms and ineffective coal allocation have led to a decline in the domestic production of these commodities. Hence, their imports have surged in the last few years. These increasing imports will put pressure on the CAD, said Ajay Sahai, director-general and CEO, Federation of Indian Exports Organisation.

The country, which used to be a net exporter of iron ore and steel till 2009-10, turned into a net importer. This has had an adverse impact on the current account deficit even though the sharp slowdown in services exports, along with heavy imports of oil and gold, were the main reasons behind widening the CAD to 5.4% of GDP in July-September.

Net iron ore and steel imports contributed $1.7 billion or 4.4% to the CAD during April-September. This was just 1.4% of CAD in 2011-12 and 1.2% in 2010-11. Before that, India was a net exporter of ores and steel and their exports helped in curbing the CAD. "The mining ban has contributed to lower exports and higher trade deficit," said Anubhuti Sahay, an economist with Standard Chartered Bank.

"Coal prices have come down in the international market and that's why the impact has been somewhat less in recent months," said Saugata Bhattacharya, head of research of Axis Bank.

India's CAD widened to 5.4% of GDP in July-September from 3.9% in April-June. It was 4.2% in all of 2011-12.

Lower mining output has also choked growth in power generation and further slowed manufacturing growth. The combined impact may drag the overall GDP growth to decade-low of 5% in 2012-13 from 6.2% last year, according to CSO estimates.